Formulation of a Health Care Organization’s Capital Budgets.

            An organization’s capital budget begins with identifying potential projects that are worth the large financial and time investment. “A survey of hospital and health system leaders in Michigan showed that capital budget development typically follows a mixed approach” (Reiter, 2013). Projects are usually started at a departmental level or staffs. The management then evaluates the projects financial and strategic viability, as well as it’s accordance to the organization’s mission and vision. If the projects seem reasonable to the management, then they will be ranked and approved by higher levels of the organization management.

Capital budgeting involves multiple internal and external parties. When planning for an organization’s capital budget, financial manager needs to take all the parties’ opinion into consideration. Some of the major external parties include government payers, commercial insurances, government or control agencies, and the organization’s financial sources, etc. Chief Executive Officer, Chief Financial Officer, and Board of Trustees are all internal parties that may affect the financial decisions of an organization.

Managers must work with the leadership, external parties, as well as internal staffs to create a capital budget that suite the individual organization. “ Ideas and data will likely come not only from physicians and hospital staff, but also from mid-level providers, office nurses, care coordinators, and other stakeholders” (Reiter, 2013). Government entities and commercial insurance payers are also important factors when designing a capital budget since the health care is moving towards value based payment system.

The next step in formulating a capital plan is to categorize projects in accordance with the organization’s strategic plan. Categories can include operational projects like replacements of equipment, and strategic projects like new services. Health care organizations also need to invest in information technology to keep up with the market and it can be categorized as both operational and strategic. Organizations that do not or cannot invest in information technology will likely to suffer in the long run due to the nature of the health care market moving toward utilizing technology heavily.

            After categorized and ranking the importance of projects, an organization needs to conduct financial evaluations of the projects. A popular and widely used method is the net present value method. To conduct a net present value analysis, an estimation of future project cash flows is required. It is a difficult task for managers and leaders to predict the future project cash flows, and it will get harder over time since the health care system is moving from fee-for-service to value-based.

            One drawback for net present value analysis is that it lacks qualitative consideration which will be crucial for a value based system. Health care organization under the value based system will not only be held accountable for expenditures, it will also be held accountable for quality and treatment outcomes. Therefore, other than using net present value analysis as a method to rank projects, health care organizations also need to incorporate qualitative measurement into the capital budgeting process. 

Resource

Reiter, K., & Song, P. (2013). Hospital capital budgeting in an era of transformation. Journal Of Health Care Finance, 39(3), 14-22.